* Bernanke: "not out of the woods" on fiscal threats
* Gives no clear hints on when Fed might curtail bond buying
* Fed chief sees economy healing, voices cautious optimism
By Jonathan Spicer
ANN ARBOR, Mich., Jan 14 Federal Reserve
Chairman Ben Bernanke urged U.S. lawmakers on Monday to lift the
country's borrowing limit to avoid a potentially disastrous debt
default, warning that the economy was still at risk from
political gridlock over the deficit.
"Not raising the debt ceiling is like a family, which is
trying to improve its credit rating saying, 'Oh, I know how we
can save money, we won't pay our credit bills,'" he told an
event sponsored by the University of Michigan.
In a wide-ranging question and answer session, Bernanke
painted a cautiously optimistic outlook for U.S. growth but gave
no clear hints on when the Fed would curb its aggressive bond
purchases, despite speculation that it will halt this year.
He also chided Congress for casting doubts over the
country's commitment to pay its debts, echoing remarks by
President Barack Obama earlier in the day.
"It's very, very important that Congress takes the necessary
action to raise the debt ceiling to avoid a situation where our
government doesn't pay its bills," the Fed chief said.
The United States scraped up against its $16.4 trillion debt
ceiling on December 31 and is now employing special measures to
meet its financial obligations. The Treasury Department said
those steps could be exhausted by mid-February.
Republicans want to use the need to increase the nation's
borrowing authority as leverage to push for deep government
spending cuts. Obama told a news conference that he would not
negotiate over the borrowing limit.
U.S. leaders agreed at the beginning of January to extend
tax cuts for all American families earning less than $450,000 a
year to avoid a portion of a "fiscal cliff" of policies that
Bernanke had said would likely tip the economy into recession.
But lawmakers must still navigate the debt limit as well as
thrash out a deal over drastic automatic spending cuts that were
postponed until March 1, and the Fed's influential chairman
warned that a fiscal impasse could still hurt the recovery.
"We're not out of the woods because we are approaching a
number of other fiscal critical watersheds coming up," Bernanke
Bernanke said the economy appeared to be responding to the
Fed's aggressive easing of monetary policy, but not as fast as
the central bank would like. "I want to be clear that while
we've made progress, there's still quite a ways to go before
we'll be satisfied," he said.
The Fed has held interest rates near zero since December
2008 and last month decided to keep buying $85 billion worth of
Treasury bonds and mortgage-backed securities a month until it
saw a significant improvement in the labor market outlook.
Minutes of the Fed's Dec. 11-12 policy meeting released this
month showed several policy makers favored ending bond buying
well before the end of this year, while a few officials thought
purchases would be warranted until the end of 2013.
Those minutes led to a sharp selloff in the bond market, and
investors are keen for a clearer signal on how soon the asset
purchases will ended.
Bernanke largely kept them guessing.
"He might be a little more optimistic because of the 'fiscal
cliff' deal. He's still pretty dovish and still unsatisfied with
where the economy is," said Craig Dismuke, chief economic
strategist at Vining Sparks in Memphis, Tennessee.
Bernanke said the purchases seemed to be effective in
lowering the cost of borrowing, but stressed the Fed was closely
watching for any unintended consequences amid concern from some
critics that it could fuel an asset price bubble.
"We have found this to be an effective tool, but we are
going to continue to assess how effective because it is possible
that as you move through time and a situation changes that the
impact of these tools could vary," he said. "When something is
more costly, you do a little bit less of it."
San Francisco Federal Reserve Bank President John Williams
said earlier on Monday that he expected the central bank's bond
buying would be needed "well into the second half of 2013."
A third policy-maker, Atlanta Fed chief Dennis Lockhart,
stressed that the open-ended or meeting-to-meeting nature of the
Fed's bond-buying program did not mean the policy would continue
"'Open ended' does not mean 'without bound.' The program is
not 'QE Infinity,'" he told the Rotary Club of Atlanta.